Why Snap Inc (SNAP) Stock Could Double by Next Year

SNAP bears are overlooking the company's greatest strength

If a picture is worth a thousand words, then the platform that takes those pictures should be worth much more. And that’s what Snap Inc (NYSE:SNAP), parent of popular messaging app Snapchat, must convince its doubters of. SNAP stock still has more of a chance than what its detractors are giving it, as they make the mistake of thinking the stock needs Facebook Inc (NASDAQ:FB) to die in order to survive.

Source: Snap

The young company has made its ambitions as a camera-focused platform in more ways than one, including the fact that it offers creative tools such as Lenses (interactive animations) that underscore its differences from Facebook.

CEO Even Spiegel has touted the camera screen as one day becoming the main starting point for most products on smartphones.

Will he be right? If so, SNAP is already there.

SNAP Stock: Peering Through a Clear Lens

On any given day, anywhere between 60% to 65% of Snapchat’s Daily Active Users (DAU), which SNAP defines as users who open the app at least once during a defined 24-hour period, create camera-sourced “Snaps”. This also means that the company’s 173 million users, which grew 21% year-over-year in the second quarter — 4% faster than Facebook’s 17% rise and almost twice as fast as Twitter Inc’s (NYSE:TWTR) 12% increase — constantly engaged on Snap’s Chat Service and its Storytelling Platform.

To that end, while we can agree that Snapchat’s DAU growth rate is slowing, it’s nonetheless time for the market to acknowledge that SNAP is, in fact, the fastest-growing company among the three in terms of user growth. Not to mention, among those DAU’s, they visit Snapchat more than 18 times on any given day, leading the increased engagement of more than 30 minutes per day from a highly sought-out demographic of 18 to 35-year olds. And when considering that over 25% of those DAUs post to their Story each day, the company can easily become a goldmine for advertisers.

As such, I continue to recommend SNAP stock as a sound investment for those who have longer-term horizons of at least 12, 18 to 24 months. The shares, currently around $15, offer compelling upside — assuming the company reaches peak monetization.

While my near-term price target of $17 assumes additional premiums of 15% from current levels, I expect SNAP stock to reach the $25 to $30 range by this time next year, delivering returns of 70% to 110%.

Where Snapchat Is Today

As it now stands, SNAP’s biggest challenge (and there are many) is living up to Wall Street’s expectations. Based on Friday’s closing price of $14.78, the California-based company’s market cap has shrunk to $17.7 billion, down from its IPO valuation of $24 billion. If you’re looking at the glass as half-full, as I do, the current market cap translates to an almost 40% jump in two weeks, rising from around $13 billion when SNAP stock plunged to all-time low of $11.28 days after announcing its second-quarter results.

The stock’s decline, which I called an overreaction, arrived even though the company grew second-quarter Average Revenue per User (ARPU) by 109% YOY to $1.05. However, as has been discussed, Snapchat’s losses continue to mount, reaching $2.68 billion in the first half of the year, compared to just $473.2 million in 2016. This overshadowed the fact that SNAP — in the first half of the year — also doubled its revenue to $331.3 million. And there’s a strong indication that revenue will continue to trend higher over time.

The question is, to what extent can SNAP convert revenue growth, which I expect to reach $3.5 billion by 2019, to profits? During that span, DAU could easily reach 250 million, assuming SNAP’s growth rate remains stable. And if those DAUs continue to spend more than 30 minutes per day on the platform, SNAP’s portion of the advertising pie — currently controlled by FB and Alphabet Inc (NASDAQ:GOOG , NASDAQ:GOOGL) subsidiary Google — will grow too.

Bottom Line for SNAP Stock

While the doom-and-gloom drumbeat continues, referencing how Facebook will crush Snapchat, those who understand the platform don’t dwell on such rhetoric.

SNAP stock longs should understand that the two most important metrics for a companies like SNAP, Facebook and Twitter are the number of active users on the platform and — perhaps even more important — the average time spent by those users. And when it comes to the latter, there’s only one clear leader.

Once advertisers become aware of this, SNAP stock can easily double from current levels. Picture that.